Tax eats into BTL profits
Changes to the tax rules on mortgage interest will hit individual BTL owners hard, says the Telegraph. This tax year landlords can only offset 75 per cent of their interest against their profits, which will fall to to 50 per cent next year, 25 per cent in 2019 and zero in 2020. Instead, there will be a 20 per cent tax credit for mortgage interest. For a BTL owner and higher-rate taxpayer currently receiving £5,000 in monthly rent and paying £4,000 in mortgage interest, their 2020 tax bill will rise from £400 to £1,200 per month. Owning property via a company avoids the tax charge, but the costs of transfer, including capital gains tax and stamp duty, are putting landlords off making the change.
Drawdown results: OK so far
The Telegraph reviewed the results from pension investments in drawdown since the rules changed in 2015. It asked how investors had fared with different strategies assuming the same income withdrawals of 4 per cent of the initial sum. Putting it all into shares gave a roller-coaster ride where at one point the fund value dipped to just under £89,000 but recovered to £105,000 in May 2017. The best result was from a multi-asset fund whose value only fell to £94,000 and had reached £104,000 by the end of the 23-month period.
Giving up the secure income from a final salary pension scheme is a big decision, says the Telegraph. Though current transfer values seem huge, they are often compared with the wrong figure: the pension entitlement at the time you left the scheme. Instead, the transfer value should be compared to the revalued income. When you do this, the transfer value may be more like 20 times the future pension rather than over 30 times. The only people for whom a decision is clear cut are those in ill health or with no dependants, for whom the control and inheritability of an independent pension fund are often much more valuable than a lifetime income promise.
Make big savings on your mortgage
People whose initial mortgage deals have expired are automatically transferred to the lender’s Standard Variable Rate. Usually, this is well above the best rates available elsewhere (the current average is 4.8 per cent) and many people could save thousands each year by switching their loan, says the Mail. Yet surveys show that people are twice as likely to switch energy supplier – for a much smaller saving – than mortgage lender. Current best-buy rates of just over 1 per cent for two-year fixes mean someone with a £150,000 loan could save £500 per month by switching from SVR.
More pay top tax rate
In 2015-16, over 364,000 people paid the top rate of income tax of 45 per cent on incomes of over £150,000, up from 311,000 the previous year, says the BBC. A further 4.2 million people, or 13.7 per cent of all taxpayers, pay the 40 per cent rate. The top 1 per cent of taxpayers had 12 per cent of total UK income and paid 27.7 per cent of all the income tax collected by HMRC.
Not working, but still paying
A third of people who expect to retire this year are still financially supporting family members, says the Independent. Most commonly, the money – an average of almost £260 per month – is going to children or grandchildren, but some are also supporting parents. Prudential, which did the research, reckoned that on average the payments would mount up to £62,000 over the course of their retirement.
Switch that CTF now
In 2011, Junior ISAs (JISA) were introduced when the government stopped paying in an initial contribution to Child Trust Funds (CTFs). And for many of the 6 million or so CTF accounts, says the Sunday Times, it would make sense to switch an existing CTF plan to a Junior ISA, because it offers a better choice of investments and lower charges. In most cases, there’s no exit fee from the CTF. The annual contribution limit for the JISA is currently £4,128 and once the account is set up anyone can contribute to it.
As tax year end approaches, there is still time to make use of your available reliefs and allowances.
This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2023/24 tax year and to plan ahead for 2024/25.
As tax rate band thresholds are changing, understanding the impact on high rate taxpayers and the economy is crucial.
It was recently revealed in the media that the amount we need to enjoy a ‘moderate’ retirement has increased by £8,000 per annum, a 38% increase, in just one year.